What is Financing Entity
A financing entity is the party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed entity. A financing entity receives a fee for providing financing and is linked to the financed entity through a chain of financing transactions across all intermediaries.
BREAKING DOWN Financing Entity
Financing entities and financed entities represent the two major parties in a financing arrangement. A financing entity provides money that is used by the financed entity. Other entities may serve as intermediaries. The financing entity can borrow the money from a bank or other financial institution using assets as collateral. For example, a business may “sell” its inventory to a financing entity, which uses this new collateral to secure a loan from a bank. The financing entity then remits the bank funds to the business, and the business repurchases the inventory and provides the financing entity with a fee. While the legal title of the business’ inventory was transferred to the financing entity, the inventory is still essentially owned by the business.
In insurance, financing entities include underwriters, lenders, and purchasers that have a direct ownership in a life insurance contract. A financing entity's primary role in a life insurance transaction is to provide funds. A financing entity is involved in the business of viatical settlement, which includes activities related to the offering, purchasing, investing, financing, selling and underwriting of life insurance policies.
Regulation for Financial Entities
Regulators seek to ensure that financial entities are in good financial condition, and consider actions that misrepresent or conceal the financial health of a financial entity as fraudulent. The Internal Revenue Service (IRS) reviews such arrangements in order to determine if the purpose of the intermediaries was to disguise the transactions as being a financing arrangement. If the IRS determines that the purpose of the financing arrangement is to lower withholding tax, it may decide on whether the intermediate entities are acting as conduits.
Due Diligence for Financing Entities
One of the primary drivers for a financing entity to ensure a level of profitability. In order to do this, the financing entity will compare the income of the prospective financed entity to its other debts and expenses. A financing entity will also look at the applicant's credit score to confirm a good record of paying back financial obligations. A financing entity doesn't always have to be an organization that gives money for loans. Private individuals can also be financing entities. For instance, everyone becomes a financing entity when they purchases stock from public companies because the investor is the one providing the funds.